Clarks' Secured Transactions Monthly

  • October 26, 2018

    Washington Court Rules That Optional Gap Insurance And Extended Warranty Protection Aren’t Elements Of A Purchase Money Security Interest In Dealer Auto Financing

    In a recent decision from the State of Washington, a bankruptcy court has ruled that, when a consumer buys a car through a dealer installment contract that is assigned to a third-party financer, the purchase of ancillary products such as gap insurance and extended warranty protection are not “purchase-money obligations” that are protected from cramdown in the debtor’s Chapter 13 bankruptcy. In reaching its decision, the court relied heavily on a leading Ninth Circuit case that refused to protect “negative equity” that was financed by the dealer in connection with the debtor’s trade-in on a new vehicle.

  • October 26, 2018

    Factor Of Construction Receivables Not Subject To Account Debtor’s Claim Against Assignor

    Under the rules of Article 9 of the UCC, an assignee of the borrower’s receivables has the right to notify the account debtor to make payments directly to the assignee. If a deflection notice is given and payments to the assignee have already been made, is the assignee required to return those payments to an account debtor who has an affirmative claim against the assignor, or is the account debtor only excused from making further payments to the assignee? That was the jackpot issue in a recent decision from South Carolina. The court ruled that the account debtor could raise the assignor’s misbehavior as a “shield” to making further payments, but not as a “sword” to recover payments already made.

  • October 26, 2018

    Supreme Court Holds American Express Antisteering Provisions Do Not Violate Federal Antitrust Law

    On June 25, 2018, the United States Supreme Court issued its opinion in Ohio v. American Express Co., 138 S. Ct. 2274, 2018 U. S. LEXIS 3845 (S. Ct. 2018). The case involved an antitrust challenge brought by the federal government and several states to “antisteering” provisions in American Express’s merchant contracts. If a merchant wants to participate on American Express’s network it must agree to the antisteering provisions, which prohibit the merchant from discouraging customers (at or near the point of sale) from using an Amex card.

  • October 08, 2018

    California Supreme Court Rules That Consumer Loans Not Subject To Usury Cap May Still Be Deemed Unconscionable

    On August 13, the California Supreme Court unanimously ruled that the interest rate on a consumer loan in California can be deemed illegally high under the common-law “unconscionability” doctrine, even if the loan was not subject to the state’s statutory usury cap. De La Torre v. CashCall, Inc., 2018 Cal. LEXIS 5749 (Cal. 2018). Currently, California law sets interest rate caps only on consumer loans of less than $2,500. The defendant in this case, CashCall, Inc., is a nonbank lender of consumer loans to high-risk borrowers. One of CashCall’s signature products was an unsecured $2,600 loan, payable over a 42-month period, and carrying an annual percentage rate of either 96 percent or, later in the class period, 135 percent. The plaintiffs in this case obtained such loans from CashCall and alleged that the high interest rates on these loans violated California’s Unfair Competition Law (UCL). The plaintiffs argued that these high interest rates made such loans unconscionable (and thus unlawful) under the UCL, even though the loans were not subject to the statutory cap because the $2600 principal amount exceeded the $2500 threshold.

  • October 03, 2018

    Garnishment Of Deposit Accounts: Operational Headaches

    Next to employers, depository institutions probably garner more incoming garnishment notices than any other group. Two of the most recurrent issues deal with joint accounts and name discrepancies. Let’s take a brief ride through this landscape.

  • October 03, 2018

    Don’t Forget Continuation Statements For Mortgages Acting As Financing Statements On As-Extracted Collateral And Timber To Be Cut

    In the oil and gas industry, a lender will typically record a mortgage that describes both the mineral interests in the ground as well as those same interests “as extracted,” i.e., the mineral interests the moment they are removed from the ground at the wellhead or minehead. The “as extracted collateral” then becomes subject to Article 9 and its continuation statement requirements. The fact that the lender recorded a mortgage and not a UCC-1A financing statement does not excuse the lender from recording a continuation statement. The same holds true for timber to be cut.

  • October 03, 2018

    When Does A Foreclosure Sale Become A Fraudulent Transfer?

    In our prior story, we reported that the U.S. Supreme Court will consider whether the federal Fair Debt Collection Practices Act applies to non-judicial foreclosures of collateral. That development reminds of us of another case decided by the High Court some years ago. The issue was whether a foreclosure sale can become a fraudulent transfer under federal bankruptcy law, on the ground that the price fetched at the sale was inadequate consideration.

  • October 03, 2018

    Does The FDCPA Apply To Non-Judicial Foreclosures?: Supreme Court To Resolve Circuit Split

    The U.S. Supreme Court has granted a homeowner’s request to consider whether nonjudicial mortgage foreclosures constitute debt collection subject to the Fair Debt Collection Practices Act (FDCPA). This appeal should resolve a split among federal circuit courts on the issue of whether nonjudicial foreclosures are considered debt collection.

  • July 26, 2018

    Congress Shields Indirect Auto Lenders From Disparate Impact Liability Under ECOA

    On May 21, 2018, President Trump signed Congressional Resolution S.J. Res. 57 (the “Congressional Resolution”) which repealed the Consumer Financial Protection Bureau’s bulletin of March 21, 2013, which had purported to find that indirect auto lenders were “creditors” under the Equal Credit Opportunity Act, 15 U.S.C. § 1691 et seq. (“ECOA”). In so doing, the Congressional Resolution, with the full backing of the CFPB, narrowed the potential application of the ECOA to indirect auto lending, presumably to protect indirect auto lenders from claims of disparate impact discrimination under ECOA. This action represents an unmistakable step toward limiting the use of disparate impact claims as an avenue for bringing claims of discrimination under the ECOA. What effect it will have on indirect auto lenders, and lenders generally, remains to be seen.

  • July 26, 2018

    Massachusetts High Court Rejects Consumer Class Action Involving Method Of Establishing Deficiency Claim

    In a case decided on June 5, 2018, the Supreme Judicial Court of Massachusetts has ruled that secured auto lenders are not required to use “fair market retail value” of repossessed cars to calculate the deficiency that the lender can obtain from a defaulting debtor under the Massachusetts Retail Installment Sales of Motor Vehicles Act, Mass. Gen. Laws ch. 255B. The RISA supplements Article 9 of the UCC with respect to secured auto loans. The case is significant in that the plaintiff class was seeking big-time civil penalties under UCC 9-625 and state deceptive trade practice legislation. Williams v. American Honda Finance Corp., 479 Mass. 656, 2018 Mass. LEXIS 351 (Mass. 2018).

  • July 26, 2018

    Ag Input Supplier V. Crop Financer: Priority Battles Continue

    Under the familiar rules of the UCC, priority between two lenders will be given to the lender who filed first. UCC 9-322. However, a key exception to the general rule is that a purchase-money security interest has priority over an earlier-filed floating lien so long as the purchase-money lender jumps through the appropriate hoops. UCC 9-324. The rationale is that the PMSI adds value to the pool of collateral by financing the price of goods delivered or enabling the debtor to acquire rights in the collateral. UCC 9-103. In fact, the PMSI has always been a favorite of the law.

  • July 05, 2018

    Fixture Financers Need To Be Aware Of The Article 9 Priority Rules

    In a notable case from Illinois, the court ruled that various replacement items of property used in a bowling alley were “fixtures” rather than “equipment.” As a result, the holder of the first mortgage on the real estate prevailed over the secured purchase-money financer of the replacement items. In reaching that conclusion, the court focused entirely on drawing the proper line between “fixtures” and “personal property” under Illinois case law. The big takeaway from the case is that the financer of the replacement items could have had priority if it had made a fixture filing under Article 9 of the UCC. Alas, the secured lender never took advantage of the priority rules for fixtures of Article 9.

  • July 05, 2018

    Absent Collusion, Transferees Of Funds In Deposit Account Have Priority Over The Claims Of Secured Lenders

    In a recent bankruptcy decision from Florida, the court subordinated the claim of a secured lender to $200,000 in funds that were deposited into the debtor’s account, then paid out to the defendant’s counsel as a retainer. Relying on an important “take-free” rule found at UCC 9-332(b), the court gave priority to the debtor’s counsel over the secured lender. In particular, the court found no “collusion” between the debtor and his counsel in violation of the rights of the secured lender. We think the decision is correct.

  • July 05, 2018

    What’s The Effect Of An Incorrect Address In A Collateral Description?

    Financing statements need not be precise in providing an “indication of collateral.” UCC 9-504 states that “[a] financing statement sufficiently indicates the collateral that it covers if the financing statement indication that the financing statement covers all assets…” Given this language, one might expect every financing statement to indicate the collateral is “all assets” with no other collateral language of any kind. But secured parties rarely do this, often deciding to add “including but not limited to…” And this leads to problems.

  • July 05, 2018

    Does A Recent Supreme Court Decision Provide A Defense For Banks Against The “Triple Whammy?”

    On numerous occasions in this newsletter, we have warned secured lenders of what we call the “triple whammy.” This is consumer protection on steroids. Many secured lenders are totally taken by surprise when they seek to foreclose and draw a counterclaim for huge damages in a consumer class action.

  • June 11, 2018

    The Golden Glove Compartment

    In our prior story, we reported on a recent Pennsylvania case that illustrates some of the risks in exercising self-help repossession. A related question that has come up in repossession litigation is whether the secured party who has repossessed a motor vehicle will be liable for personal property left in the car.

  • June 11, 2018

    Wrongful Repossessions Continue To Haunt Secured Lenders

    A recent decision from Pennsylvania raises a number of issues for secured lenders who use self-help repossession: When is there a "breach of the peace," which is forbidden under UCC 9-609? To what extent can involvement of law enforcement officers shield the foreclosing creditor from liability? Do law enforcement officers who aid the secured lender face liability for violation of civil rights laws? If a repo by an independent contractor becomes contentious, is the secured lender vicariously liable for punitive damages?

  • June 11, 2018

    LLC Membership Interests As Collateral

    How does a lender perfect a security interest in a borrower's ownership interest in a limited liability company? Businesses today are often organized as limited liability companies, or LLCs as they are commonly known. LLCs offer the limited-liability protection of a corporation with the pass-through tax advantages of a partnership; however, they are much more flexible than traditional pass-through entities.

  • June 11, 2018

    New Jersey Court Rules That Securitization Trustee Is Holder In Due Course Of Mortgage Debt

    A recent decision from New Jersey holds that US Bank, as trustee of a securitization trust, had standing to foreclose on a home mortgage, with power to take free of the debtors' defenses, including predatory lending. The New Jersey case is a poster child for the mortgage meltdown which led to the Great Recession.

  • May 03, 2018

    Pre-Petition Retainer Goes To Debtor's Bankruptcy Counsel, Free From Competing Claim Of Blanket Secured Lender

    In a recent bankruptcy decision from Florida, the court subordinated the claim of a secured lender to $200,000 in funds that were deposited into the debtor's account, then paid out to the debtor’s counsel as a retainer. Relying on an important "take-free" rule found at UCC 9-332(b), the court gave priority to the debtor's counsel over the secured lender. In particular, the court found no "collusion" between the debtor and his counsel in violation of the rights of the secured lender. We think the decision is correct.